AT&T PLANS TO EXPAND LOCAL SERVICE BASED ON UNE-P STRATEGY

While their comments reflect public stances that Bell companies and competitors have taken in UNE-P debate in Washington, neither Seidenberg nor Dorman discounted potential role for LECs leasing UNEs in at least short-term. But not surprisingly, they disagreed on usefulness of this strategy after that. FCC’s existing rules mandate that Bells lease UNEs at what incumbents claim are below-cost rates. Competitors using UNE-P devise their networks by leasing parts of Bell company networks at low-cost TELRIC prices. Their divergent views come as both sides of industry have stepped up lobbying on UNE issue at FCC.

UNE policy was hottest regulatory issue that received repeated mention by investors and company top brass Mon. at conference. Telecom CEOs for companies ranging from Nextel to Motorola to AT&T stressed extent to which they were focused on decreasing debt load and increasing positive cash flow. Additional common theme among several top executives in wireless industry was extent to which focus now, compared to several years ago, is on deriving more revenue from customers from applications such as new data offerings rather than concentrating mainly on growing subscriber base. Warburg wireline analyst John Hodulik said telecom sector has had “a solid move off the bottom.” Question is now is whether rally will continue, he said.

Dorman said AT&T now has more than 2 million residential “any-distance” customers based on UNE-P. Local presence via UNE-P in total of 14-17 states by end of 2003 would represent about 70% of Bell companies’ consumer access lines, he said. At Warburg conference he stressed Telecom Act negotiations in 1996 had marked balancing -- or quid pro quo -- between long distance entry for Bell companies in exchange for access to local markets for IXCs by using Bell legacy networks. “It [UNE-P] may be transitional. It may be in advance of ultimately facilities based deployment. But it’s a necessary part leading up to that and it would be a mistake to re-trade that at this point,” he said. Dorman said he wouldn’t oppose sunset date for UNE-P if Bell companies made electronic loop provisioning available on automated basis: “Then you are creating more incentives toward a more capital efficient deployment… Ultimately the Bells, as they lose share, will become a lot more interested in the wholesale business.” In Mich., AT&T achieved 6% market share in about 5 months by offering local services using UNE-P. “SBC responded to that by lowering prices and offering new packages,” Dorman said: “From a regulator’s perspective in those states I think this has been consistent with the record created by the state- level regulators, which is that UNE-P has proven to be a valuable tool in opening up the local market more fully, particularly for consumer competition.”

“There is no question in our minds that regulatory agencies forcing rates down and using that in the name of creating competition makes no sense,” Seidenberg told investors in keynote. He called UNE-P “maddening, destructive” policy, reiterating concerns he has raised in past. While UNE policy has impact on both financial and margin side of company, Seidenberg said his concerns were moderated by differences between short-term and long-term impact. “In the near-term, it’s a problem,” he said. “In the slightly longer-term, it’s going to destroy those who use it anyway,” he said. Point is that business plans built solely on UNE-P are destined to fail, in part because carriers don’t control margins. Competition that UNE policy is designed to foster is already being provided through services offered by cable companies, wireless carriers and others, he said.

Questioned by one investor about UNE-P as long-term strategy for AT&T, Dorman said that before Michael Armstrong became chmn., company spent about $2 billion building total service resale platform. While Armstrong scrapped that strategy when he took helm, Dorman said that over last 5 years, “that initial investment has been refined to the point where we can enter a new state with the national UNE-P platform that we have for probably about a million dollars.” Marketing and customer acquisition costs aren’t included in that figure, which Dorman called “a leverageable investment we made.” He cited example of prices in Cal. as allowing positive gross margin for adding customers at UNE-P rates. Bundling long distance into this mix allows for further incentive for customer to remain with AT&T, he said.

Dorman countered what he said was Bell company mantra that only real competitive alternative was facilities-based. “Go to any major city in the U.S. and think about the challenge of putting a wire into every building and office that you see,” he said. Between TelePort and other investments, AT&T has invested $20 billion and has penetration in about 7,500 buildings, Dorman said. While company is in many dense business corridors, much of business market is disaggregated, he noted. “That is a reason that the unbundling requirement was an essential quid pro quo for long distance entry” when Telecom Act was passed, he said.

Asked about possibility of wireless consolidation, Seidenberg said trend would be good for industry but not necessarily something that Verizon needs to do. “We are interested in acquiring more spectrum,” he said: “Consolidation is one way to get there. It’s not the only way.”